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Yra Harris: "There Are Increasing Concerns Around The Globe That Central Bankers Do Not Have An Exit Strategy"

Back in November, we brought to the attention of our readers a stunning admission from one of Citi's head credit strategists, Hans Lorezen, who said matter-of -factly that during his conversations with central bankers, there was a growing fear that they've lost control:

In the context of a self-reinforcing, herding market, the pivot point where the marginal investor is indifferent between putting more money back into risk assets and holding cash instead is fluid. But when the herd suddenly changes direction, the result is a sharp non-linear shift in asset prices. That is a problem not only for us trying to call the market, but also for central bankers trying to remove policy accommodation at the right pace without setting off a chain reaction – especially because the longer current market dynamics run, the more energy will eventually be released.

That seems to be a growing fear among a number of central bankers that we have spoken to recently. In our experience, they too are somewhat baffled by the lack of volatility and concerned about the lack of response to negative headlines.... Our guess is that sooner or later in the process of retrenchment they will end up going too far – though that will only be obvious with hindsight.

Fast forward to today when as Yra Harris writes in his latest Notes from the Underground, the realization that central bankers are on the verge of panic is that much closer, because as the veteran trader and strategist notes, "the continued efforts by the ECB, BOJ and Swiss National Bank to keep their overnight rates at crisis-era levels is increasing concerns around the globe that central bankers in general do not have an exit strategy."

Yra also had some choice words for the SNB, saying that the Swiss franc "is indeed the true crypto currency as it doesn’t have to be mined but printed."

It has a much greater green footprint as it uses far less energy. What’s a small forest of trees in relation to the vast amount of energy consumed in the search for ICOS. As the markets begin to FEEL the weight of mountains of debt coupled with higher borrowing rates, we stand in awe of the “accomplishment” of the SNB."

And his punchline:

Print currency. Sell to the markets. Use proceeds to purchase global equities. This is the poster child for the MADNESS of central banking and global finance. (In case there were any doubts as to why 2+2=5.)

The continued efforts by the ECB, BOJ and Swiss National Bank to keep their overnight rates at crisis-era levels is increasing concerns around the globe that central bankers in general do not have an exit strategy. ECB President Mario Draghi’s press conference on Thursday was a piece of obfuscation worthy of a teenager being interrogated by its parents. The EURO currency succumbed to the unequivocal dovish stance of President Draghi as he maintained that risk in Europe remains elevated. When a Handelsblatt reporter kept asking why the ECB had no road map out of the emergency measures that it implemented, Draghi answered that the ECB did not even discuss monetary policy at the meeting. WHAT? President Draghi made certain to present headwinds pertinent to the ECB: Fear of rising tariffs; the inability of European governments to devise a plan for unified risk sharing; and, of course, the continued failure of the EU to embark on a plan for fiscal stimulus.

As Draghi stressed when discussing the rise in U.S. yields: “Increase in yields in the U.S. to be expected because of differences in business cycles and the fiscal expansion recently enacted. Plus, U.S. at 4% unemployment.” Mario the Magician should be reminded that the ECB does not have an employment mandate, as its only “concern” is inflation. The problem is with no harmonized fiscal program why should a unitary inflation number be the key data point? Germany, the EU’s largest economy, is running inflation above 2%, which is crushing the German savers. But as Draghi insisted, monetary policy will require a steady hand to ensure PRUDENCE, PATIENCE and PERSISTENCE.

Chancellor Merkel’s visit to the White House further highlighted the issue of the EURO ownership. When President Trump lays criticism upon Germany for its massive current account surplus Merkel has little leeway to respond as German corporate interests continue to benefit from a currency way to weak for its economic prowess. The Chancellor cannot raise interest rates to stem inflationary pressures or embark upon any measures to affect the currency it does not directly control. Germany remains an easy target for the Ross/Lighthizer/Mnuchin/Navarro group as it is locked into a fragile situation. Merkel’s fragility was center stage on Friday at the White House. The juxtaposition of Trump’s embrace of Macron to the frostiness of Trump to Merkel is a realization of the German chancellor’s diminished political stature within her own nation and thus Europe. Even knowing the underlying scenario it boggles the mind to continue to see the RIDICULOUS LOW YIELDS that inhabit the charts of various EU sovereign bonds (Spain 10-year 1.26%; Belgium 0.82%; Portugal 1.65%; and Italy at 1.74%).

In my opinion, the continued drop in European yields is the cause of the ECB but the effect is the bundling of BONDS by buyers in an effort to attain higher yields. Mix together some German, Dutch, Austrian paper, and then throw in some Greek and Italian debt. This basically mirrors the securitization of SUBPRIME loans that took place in the U.S. a decade ago. What makes this all the more toxic is that European domestic banks and other financial institutions are encouraged to keep the charade going because global banking regulation makes the SOVEREIGN DEBT A ZERO RISK WEIGHTING. Thus, no reserves required. It’s a feedback loop of dynamic proportions.

Will the rise in U.S. yields be the disrupting force in global markets as cash ascends as an asset class? Will the FED enact its THIRD MANDATE as a the backstop for the global financial system because of the key position of the world’s reserve currency? Something to think about ahead of the FOMC meeting this week.

***An ongoing issue at NOTES FROM UNDERGROUND has been the ALCHEMY of the Swiss National Bank. This blog accurately predicted the breaking of the SWISS/EURO PEG four weeks before the January 15, 2015 day of action and did so with Rick Santelli in December 2014. This year we have discussed the success of the SNB of returning the Swiss franc back to the coveted 1.20 PEG RATIO. The ALCHEMIST AWARD FOR ALL OF HUMAN HISTORY HAS BEEN BESTOWED ON THE SNB.

On Friday, the SNB held its SHAREHOLDER meeting (yes, it’s publicly held) and it was reported in the WSJ that over the last year the price of SNB shares have risen to 7180 CHF from 1760 CHF, actually hitting a 10,000 per share in the interim. While others have discussed crypto currencies I have noted that the Swiss franc is indeed the true crypto currency as it doesn’t have to be mined but printed. It has a much greater green footprint as it uses far less energy. What’s a small forest of trees in relation to the vast amount of energy consumed in the search for ICOS. As the markets begin to FEEL the weight of mountains of debt coupled with higher borrowing rates, we stand in awe of the “accomplishment” of the SNB.

Earlier in the week, SNB President Thomas Jordan, who is a political appointee and not the chairman of the public company, stated that the EUR/CHF at 1.20 was a move in the right direction and that the bank would be in no hurry to change course. Like Mario Draghi, Jordan has no road map out of QE. And why should the SNB seek to end QE? The weaker the SWISS currency, the more profits for the shareholders because the SNB balance sheet is a cacophony of foreign assets.

Print currency. Sell to the markets. Use proceeds to purchase global equities. This is the poster child for the MADNESS of central banking and global finance. (In case there were any doubts as to why 2+2=5.)